Employee Stock Ownership Plans Can Enhance Corporate Perform- Ance, but Most Esops Have Not Been Structured to Realize Their Full Potential in This Area

JANUARY 1988 NUMBER SEVENTY-FOUR

Employee stock ownership plans can enhance corporate performance, but most ESOPs have not been structured to realize their full potential in this area.

Employee Stock Ownership Plans: Impact on Retirement Income and Corporate Performance

Employee stock ownership plans, or ESOPs, are employee benefit plans that provide shares of stock in the sponsoring company to participating employees. They have sometimes been credited with the potential for improving U.S. corporate performance and employee attitudes.

The U.S. General Accounting Office (GAO) released a report in late 1987 finding that most ESOPs have not improved corporate performance as measured by profitability and productivity. GAO acknowledges, however, that when ESOPs include broad employee participation in company decision making, they have a greater impact on corporate performance. Other studies confirm this latter finding (Quarrey, 1986). In addition, a survey by Rosen, Klein, and Young found that the amount of stock contributed to participants' accounts was the single most important factor in boosting employee satisfaction with the ESOP, which, in turn, might be linked with better corporate performance.

Most ESOPs, however, have not been structured to realize their full potential in these areas. Tax-credit ESOPs covered 7 million employees in 1983, more than other types of ESOPs. These plans havebeen popular with companies, who could take a credit against income tax for employer contributions. But tax-credit ESOPs typically provide only a limited amount of ownership in a company. For example, in 1983, tax-credit ESOPs provided a median account balance of just under $3,000, compared to between $5,000 and $8,600 for other ESOPs. Moreover, only 5 percent of tax-credit ESOPs own more than 25 percent of their companies, compared to 44 percent of leveraged ESOPs. Leveraged ESOPs, which borrow funds to acquire employer securities, typically provide a larger degree of ownership. These ESOPs may increase in popularity as a result of the elimination of tax-credit ESOPs in the 1986 Tax Reform Act and the increased tax incentives to leverage included in other recent legislation. ESOPs have also attracted increased attention of federal policymakers, who have voiced concern about their use as a corporate financing tool in leveraged buyouts and about their relative riskiness as retirement income vehicles because of the concentrated investment in a single corporate stock.

! A monthly periodical from the EBRI Education and Research Fund devoted to expert evaluations of a single employee benefit issue ESOPs have been used to help save struggling compa- • Introduction nies.

An employee stock ownership plan, or ESOP, is a tax- Leveraged ESOPs can participate in multi-investor qualified employee benefit plan that provides shares of leveraged buyout transactions. Under such transac- stock in the sponsoring company to participating tions, two or more investors each buy a large block of employees. ESOPs resemble other employee benefit stock in the target company. The use of ESOPs in these plans in that they supplement other forms of employee transactions has been controversial, with critics some- compensation. Like other compensation supplements, times charging that ESOP abuses outweigh potential ESOPs have implications for employee recruiting, benefits and calling on policymakers to regulate ESOP performance, and morale. Like other tax-favored use more strictly, or to curtail or eliminate ESOP tax benefit plans, they represent forgone tax revenues to the breaks. federal government. _ __ _

ESOPs (and stock bonus plans) are sometimes credited _ _" with greater potential than other forms of compensation to improve employee motivation because ESOP partici- ESOPs have been advocated as a way to pants acquire an ownership interest in the company for broaden the ownership of productive capital which they work. In addition, ESOPs are sometimes established in conjunction with programs that encour- and thereby provide the means for more indi- age greater employee participation (work place "de- viduals to participate gainfully in the economy mocratization"), further affecting the incentive struc- with capital rather than through labor alone. ture. Some critics assert, however, that ESOP use rarely involves a substantial change in employee relations or _ _ ,_ work place philosophy but instead primarily reflects interest in bottom-line tax advantages. Furthermore, some who favor more traditional management styles ESOPs have been advocated as a way to broaden the oppose work place programs that give rank-and-file ownership of productive capital and thereby provide workers more control, the means for more individuals to participate gainfully in the economy with capital rather than through labor An ESOP is a type of defined contribution plan. Like alone. Some ESOP advocates contend that the existing other defined contribution plans, ESOPs are designed to concentration of stock ownership is a reflection of provide deferred compensation and can provide cash fundamental institutional flaws and a cause of many of benefits at retirement or a portable benefit upon separa- the nation's current economic problems, and they tion from service. However, because ESOPs must be advocate ESOPs as a way to correct some of these flaws. invested primarily in the stock of the sponsoring But just how far ESOPs could potentially broaden company, they are often characterized as riskier than ownership is not yet clear, and there is disagreement other defined contribution plans, which usually hold about the economic benefits of such broadening. more diversified portfolios. In recent years, use of ESOPs and other stock ownership ESOPs are a unique type of benefit plan because they plans has grown rapidly. The U.S. General Accounting are permitted to borrow money on a tax-favored basis Office (GAO) identified 4,174 active ESOPs in 1985. to purchase employer stock. (ESOPs that exercise this These plans covered 7.1 million participants in 1983. option are called "leveraged ESOPs.') Thus, an ESOP The elimination of the tax-credit incentives for ESOP can be an advantageous corporate financing tool under contributions under the Tax Reform Act of 1986 (TRA some circumstances. ESOPs can be used to create a "86) could reduce these numbers significantly, however, market for a retiring owner's stock, to finance capitali- because 26 percent of these ESOPs, covering 90 percent zation, or to finance acquisitions. In isolated cases, of participants in 1983, took advantage of the tax-credit

2 • EBRI Issue Brief January 1988 provision (GAO, 1986). If ESOPs using the tax credit called a "leveraged ESOP"; one that does not is some- are excluded, the number of employee ownership plans times called a "qeverageable ESOP." (If a leverageable (including ESOPs, stock bonus plans, and money ESOP makes no provision for leveraging in its plan purchase and profit sharing plans that invest in em- document, it may be called a "nonleveraged ESOP.') ployer stock) increased from 1,601 plans covering Another type of ESOP, the tax-credit ESOP, is not 248,000 employees in 1975 to 8,046 plans covering 7.0 permitted to use leveraging but may take a tax credit for million in 1986, according to the National Center for employer contributions to the plan. Tax-credit ESOP Employee Ownership (NCEO, 1987). provisions, enacted as part of the Tax Reduction Act of 1975, have since expired. Many forces have contributed to this rapid growth. Perhaps most significant is the legislation enacted by Congress to encourage employee ownership. Cur- rently, leveraged ESOPs enjoy more liberal deduction limits than other defined contribution plans, and The most important characteristics that distin- lending institutions enjoy favorable tax treatment for guish ESOPs from other defined contribution loans made to ESOPs. Former Sen. Russell B. Long (D- plans are the requirement that an ESOP invest LA), a long-time advocate of ESOPs, has written that "primarily" in employer stock and the ability during his tenure with the Senate Finance and Com- merce committees, "19 separate pieces of legislation of an ESOP to borrow money on a tax-favored were enacted improving the prospects for employee basis. ownership" (BNA/NCEO, 1987).

After defining ESOPs, this Issue Brief will provide a brief history. It will explain how ESOPs work, outline current legal provisions that encourage or regulate As defined contribution plans, ESOPs are granted ESOP use, and discuss current trends. Issues confront- certain tax advantages under the Internal Revenue Code ing employers, employees, and policymakers will be (IRC). These include the deductibility, within certain highlighted. This Issue Brief will examine the effects of limits, of contributions to the plan trust and the tax- ESOPs on employee attitudes and corporate perform- deferred build-up of asset earnings in the trust. ESOPs ance and will review public perceptions of ESOPs. are also restricted by many of the same laws that govern Finally, this Issue Brief will consider the outlook for other tax-qualified defined contribution plans, includ- ESOPs in the near future, summarizing current federal ing nondiscrimination requirements, distribution rules, legislative and regulatory developments affecting and minimum participation and vesting standards. ESOPs and state employee ownership initiatives. However, there are important exceptions (detailed later in this Issue Brief). "_ Background The most important characteristics that distinguish Definition ESOPs from other defined contribution plans are the requirement that an ESOP invest "primarily" in em- ESOPs are qualified with the Internal Revenue Service ployer stock and the ability of an ESOP to borrow (IRS) as stock bonus or money purchase pension plans, money on a tax-favored basis. Other legal restrictions In addition, ESOPs are sometimes structured as profit unique to ESOPs are generally designed to address sharing or 401(k) plans. ESOPs differ from pure stock these two special features. bonus plans in two important ways: a stock bonus plan (1) is not required to invest primarily in employer secu- History rities; and (2) does not use leveraging. ESOPs are often distinguished by their use of the leveraging provision. Although the ESOP has been recognized as a distinct An ESOP that elects to borrow money to acquire stock is employee benefit only since the passage of the Em-

January 1988 EBRIIssue Brief • 3 ployee Retirement Income Security Act (ERISA) in 1974, broaden the ownership of productive capital and, in so the concept of employee ownership is not new. The tie doing, strengthen and stabilize the economy. between ownership and work is deeply rooted in the history of the U.S. economy, in such institutions as Before the passage of ERISA in 1974, Kelso constructed family farms and family-owned retail businesses and the ESOP as a type of qualified defined contribution among independent tradesmen, pension plan that invested more in the employer's stock than a typical plan. However, between 1959 and 1974 The idea of worker ownership in larger companies with only about 275 ESOPs were established (Profit Sharing more concentrated means of production is also not Research Foundation, 1985). entirely new. The first formal stock ownership plan on record in the U.S. was started in 1879 by Rand McNally and Co., the Chicago publishing firm. Although the plan was initially limited to supervisory personnel, by 1886 the firm had distributed 560 shares of stock to 47 employees (Gilman, 1889). Between 1918 and 1925, Kelso proposed the leveraged ESOP as one more than 338,000 employees of railroads, utilities, and way to open what he perceives to be a closed manufacturing firms (mostly managerial or sales circle of capital ownership. He contends that personnel) became participants in stock subscription leveraged ESOPs can help broaden the owner- plans, under which stock was acquired through salary reduction (James et al., 1926). ship of productive capital and, in so doing, strengthen and stabilize the economy. Kelso's Theories and the ESOP Idea--Louis O. Kelso, a San Francisco lawyer, is generally credited with the ESOP concept. He first described it in The Capitalist Manifesto, which he wrote with Mortimer Adler in 1958. In this and later writings he suggests that the high concentration of wealth ownership in the U.S. is morally Sen. Long and Congressional Initiatives--In 1973 Kelso unacceptable and destructive to the economy (Kelso met Sen. Long, then chairman of the Senate Finance and Kelso, 1986). He criticizes as false the concept Committee. At that time, the committee was consider- advanced by some economists that the benefits of the ing the legislation that would eventually become growing U.S. economy should be broadly distributed ERISA. Because of Long's efforts, ERISA recognized on the basis of "the increasing productivity of labor." ESOPs as qualified employee benefit plans and made He argues that because increased output is more employee ownership law a part of retirement law. It attributable to capital than to labor, higher wages further provided qualified ESOPs with the unique represent a misallocation of economic resources, ability to leverage. Including ERISA, Congress has enacted 17 ESOP tax laws (Rosen, 1987). Some of the Inflation, unemployment, surplus productive capacity, more important ESOP-related public laws are summa- and other economic problems are all attributable to rized below. 1 these institutional misconceptions, he contends. Kelso concludes that, in order to have efficient allocation and Tax-Credit ESOPs--The Tax Reduction Act of 1975 broad opportunity for participation in an increasingly allowed an extended investment tax credit equal to capital-intensive economy, it is necessary to modify qualified contributions to a special nonleveraged ESOP existing institutions so that all individuals can earn income through both labor and capital ownership. 1 The following discussion draws heavily from U.S. General Kelso proposed the leveraged ESOP as one way to open Accounting Office, Employee Stock Ownership Plans: what he perceives to be a closed circle of capital owner- Benefits and Costs of Tax Incentives for Broadening Stock ship. He contends that leveraged ESOPs can help Ownership (Washington, DC: GAO, 1986).

4 • EBRIIssue Brief January 1988 called a TRASOP (Tax Reduction Act stock ownership stock distributions. This meant that ESOP participants plan). The Tax Reform Act of 1976 increased the receiving stock distributions could require the company allowed credit. Under the 1981 Economic Recovery Tax to buy back the stock at a fair market price within a Act, beginning in 1983 the basis for the allowed tax specified period. It was feared that, without this credit was shifted from investment to payroll, replacing provision, retiring or terminating participants would the TRASOP with the PAYSOP (payroll-based stock not be able to sell their nonpublicly traded stock. Also ownership plan). The tax credit allowed for PAYSOPs in 1978, legislation was enacted requiring publicly was repealed for compensation paid or accrued after traded firms to "pass through" full voting rights for Dec. 31, 1986, by the 1986 Tax Reform Act. allocated ESOP stock to ESOP participants and requiring privately held companies to provide such rights on Participants" RightsIn 1978, closely held companies major corporate issues, including the sale of the com- (those whose stock is not traded on an established pany, refinancing of major debts, and proposed merg- market) were required to attach "put options" to ESOP ers.

Trust

Stock:. $ ESOP , ...... $

Company Employees

(1) Each year;_thecompanygives.st_ tothe ESOP Or (2) g.ives_sh to the ESOP to bUystock: Employ- ees paylfor nothing: ESOP holdsst_ for employeesand periodicallynotifiesthem howmuch they own and.howlm_Chit is worthi (3) E_Pioyees collect stock"0i_cash whentheyretire or othe_ se leave the companyi,according to the vestihgSChedule:

Note Diagramtaken from Sophie Korczyk;"Employee Stock Ownership and Recent Po cy Changes," Peat Marwick Spectrum 9 (November 1986)

I January 1988 EBRIIssue Brief • 5 Dividends--The Tax Reform Act of 1976 authorized Nonleveraged ESOPs ESOPs to pass through dividends on allocated ESOP stock to ESOP participants. The Deficit Reduction Act The operation of a typical nonleveraged (or leverage- of 1984 (DEFRA) further encouraged this by allowing able) ESOP is shown in chart 1. The company sets up companies to deduct cash dividends passed through to an ESOP trust and periodically contributes to it. The ESOP participants, company may contribute stock directly or contribute cash, which the fund uses to purchase stock. The stock Lender Incentives--DEFRA provisions allow banks to is immediately allocated to the accounts of employees, deduct 50 percent of the interest earned on ESOP loans, who are periodically notified of their account balances. The TRA "86extended this provision to regulated Subject to vesting schedules, retiring or terminating investment companies, participants generally can elect to receive the stock allocated to their account or the cash equivalent of the stock's fair market value.

Leveraged ESOPs

In contrast to a nonleveraged ESOP, where In a leveraged ESOP, funds are borrowed to acquire stock is acquired slowly through employer employer securities. This can be accomplished in one of contributions, a leveraged ESOP generally two ways (chart 2). An employer may arrange to sell acquires a large block of stock purchased with the ESOP a specified amount of qualified employer the borrowed funds, securities at fair market value. The ESOP then borrows the funds needed to purchase the stock. The lender may be a bank or regulated investment company or the employer or shareholders in the employing company. The loan may be guaranteed by the employer, or the Incentives for Sale of Stock to ESOPs--DEFRA allows stock may be pledged as collateral. The loan is repaid owners of closely held companies to defer capital gains with the employer's tax-deductible contributions to the taxes when selling stock to an ESOP. It further allows ESOP. As the ESOP loan is repaid, shares of stock are employers to assume an estate's tax obligation in return allocated to the participants' accounts. Unallocated for an equal amount of employer stock transferred from shares remain in the ESOP trust and can continue to the estate to the ESOP. TRA "86permits the exclusion of serve as collateral for the remaining loan balance. 50 percent of the qualified proceeds from the sale of employer stock to an ESOP from the taxable value of an Alternatively, the employer may borrow the money and estate. IRS guidelines and the recently passed Omnibus transfer stock to the ESOP in exchange for a promissory Budget Reconciliation Act of 1987 (P.L. 100-203), note. The employer makes deductible contributions to restricts this provision retroactively to stock held by the the ESOP, which uses these contributions to pay off the decedent immediately before his or her death, note. These repayments to the employer, in turn, are used to pay off the employer's loan.

How ESOPs Work In contrast to a nonleveraged ESOP, where stock is There are two major types of ESOPs: nonleveraged and acquired slowly through employer contributions, a leveraged ESOP generally acquires a large block of leveraged. 2 The tax-credit ESOP had been gaining popularity but was eliminated as of year-end 1986. stock purchased with the borrowed funds. This means that a leveraged ESOP can acquire a large share of ownership in a company much faster than a nonleveraged ESOP. Furthermore, if the loan is used to buy 2 The following discussion draws heavily from Sophie stock from the employer (rather than from outside Korczyk,"Employee Stock Ownership and Recent Policy existing stockholders), the ESOP transaction provides a Changes," Peat Marwick Spectrum 9 (November 1986). cash infusion to the employer.

6 • EBRIIssue Brief January 1988 " : Chart2 ...... 'i LeVemged E$OP

I I

Bank Guarantee

Company

: _nual: PrOmissOry: • tment Note Annual

ESOP Trust Stock Employees

Shareholders

(1) Ba_ lends:.moneyto.ESOP with.cornpartyguarantee.: (2) ESOP buys stockfrom_mpany or (2A) from existing shareholdem;:(3)company makes:annualtax-d_uctible:COntributionsto ESOP whiCh+intgrr_repaysbank, (4) Employe__ lect stockotcash whenthey i'etireOrothe_Seleavethe company,a_rding to the.vestingschedUle:

N0te_Diagramtaken_mmSophie Komzyk:",Emploi/eeStock_iiershii5 andRecent PolCyChanges," Peat Marwick Spectrum g (NoVamber 1986):

Tax-Credit ESOPs

The 1987 budget reconciliation bill did not include a '86 (originally included in budget reconciliation) provision related to termination of tax-credit ESOPs proposed to limit termination of tax-credit ESOPs with that had earlier caused controversy in the employee assets held less than 84 months to instances where benefits community. Because the 1986 Tax Reform Act lump-sum distributions are made and no successor plan eliminated tax-credit ESOPs, many employers have is established. Some interpreted the provision as considered terminating existing plans altogether. How- regarding any defined contribution plan as a successor ever, an early version of a technical correction to TRA plan, even if the plan were established prior to PAYSOP

January 1988 EBRIIssue Brief • 7 termination. Thus there was a question as to whether account. Five years later, the participant must be an employer sponsoring an ongoing defined contribu- allowed to diversify at least 50 percent. Alternatively, tion plan could legally terminate a PAYSOP without the ESOP may distribute the amount that could be first fulfilling the 84-month waiting requirement, diversified.

ESOP Regulations and Restrictions Fiduciary Responsibility--Fiduciaries must meet ERISA standards by acting in the exclusive interest of parfici- General ERISA Rules--ESOPs are subject to many of the pants and in a prudent manner. However, they are general ERISA and tax code rules governing qualified generally not required to diversify assets, except in retirement plans, including minimum participation and response to self-directed diversification options elected vesting standards. ESOPs also must adhere to addi- by qualified participants nearing retirement. The tional qualification requirements aimed at recognizing special nature of ESOPs creates the potential for many the special uses and characteristics of these plans, violations of fiduciary responsibility. For example, an ESOP can be used to privatize a publicly traded company by buying shares from the public market. If acquiring all the shares requires paying a premium price, doing so may not be in the best interest of partici- ESOPs are subject to many of the general pants. Similarly, if an ESOP buys a company's stock to defend against a hostile takeover attempt, a premium ERISA and tax code rules governing qualified price might be paid. Recently, concern has grown over retirement plans, including minimum partici- how to apply ERISA's fiduciary rules to ESOP fiduciar- pation and vesting standards, ies in the context of multi-inyestor leveraged buyouts. This issue is discussed in more detail below.

Voting Rights--ESOP participants must be allowed certain voting rights. For stock that is readily tradeable (stock of a public company), full voting rights for all Investment of Assets--ESOPs must be designed to invest allocated shares must be passed through to participants. primarily in qualifying securities of the employer. In For stock of closely held companies, voting rights must practical terms, this means that at least 51 percent of a be passed through on all major corporate issues, specifi- plan's assets must be so invested. Qualified employer cally those that must be decided by more than a major- securities may include readily tradeable common stock, ity vote. Shares not voted by participants are voted by stock with voting power and dividend rights, preferred the ESOP trustee. stock that is convertible into qualified common stock, and stock of affiliated corporations. Debt instruments Distributions--ESOPs are permitted to make distribu- are not included, tions in either stock or cash. Unless the sponsoring company's charter or bylaws require that substantially Diversification--For stock acquired after 1986, ESOPs all of the company's stock be owned by employees, must provide means for qualified participants nearing participants must be allowed to take their distribution retirement to diversify part of their ESOP account in stock. 3 Generally, the full amount must be paid out balance and must offer a choice of at least three nonem- over no more than five years, although the participant ployer investments. (Proposed Department of Labor rules may change this requirement. For further information, see "Legislative and Regulatory Initiatives.") In 3 Unless the separating participant elects otherwise, distribu- general, beginning with the plan year following the tions attributable to stock acquired after December 31, 1986, participant's attainment of both age 55 and 10 years of must begin within one year following the plan year in which the participant retires, dies, or becomes disabled, or within participation, the participant must be provided the five years after the participant separates from service for any opportunity to diversify at least 25 percent of the total other reason (if not reemployed with the same company).

8 • EBRIIssue Brief January 1988 can elect to extend this period. Also, the period can be ESOP Tax Advantages extended up to an additional five years for account balances in excess of $500,000. Liberal Deduction Limits--ESOPs generally enjoy more liberal tax advantages than those granted other defined contribution plans. For example, ESOP contributions - _ that are used to repay an ESOP loan are not subject to the usual 15 percent of covered compensation deduc- A participant receiving nonpublicly traded tion limit. Instead, employers can deduct contributions used to pay the loan principal up to 25 percent of stock must be given an option to sell the stock compensation. Unlimited deductions are permitted for to the employer at an independently appraised contributions used to pay loan interest. Employers fair market value, generally may also deduct dividends paid on ESOP stock to the extent that the dividends are distributed in -_ cash to participants or used to repay the principal on the ESOP loan. These liberal deduction limits help accelerate the rate at which ESOPs can repay loans, A participant receiving nonpublicly traded stock must thereby allowing more rapid allocation of ESOP stock to be given an option to sell the stock to the employer at participants' accounts. Also, by encouraging the pass- an independently appraised fair market value (a put through of dividends, these provisions promote the use option). For stock acquired after 1986, the employer can of ESOPs to provide a current benefit in addition to the pay for the stock in annual installments, over a period usual deferred benefit. of up to five years, beginning no later than 30 days after the sale, paying reasonable interest. The employer must lender Incentive--Banks and regulated investment provide security for the unpaid balance of deferred companies can deduct 50 percent of the interest earned payments. The employer and the ESOP may exercise a on ESOP loans. Some of this advantage can be passed right of first refusal to repurchase nonpublicly traded on to the ESOP through lower interest rates. stock distributed by the ESOP. Incentives for Sale of Stock to an ESOP--Major sharehold- Valuation--For stock acquired after 1986, all valuations ers of stock in a closely held company can defer all taxes of employer securities that are not readily tradeable on on the sale of employer stock to an ESOP if, upon the an established securities market must be made by an completion of the sale, the ESOP owns at least 30 independent appraiser. Contributions, purchases, and percent of the company and the seller reinvests the distributions must be made at the value determined by proceeds in qualified domestic securities within one the independent appraiser, year after (or three months before) the sale. The share- holder must have held the employer stock for at least Loans--Special exceptions in ERISA and the tax code one year and must not have received the stock in allow ESOPs to leverage, or borrow funds, to acquire connection with employment. This provision allows stock. ESOP loans must bear a reasonable interest rate owners of closely held businesses who are approaching and be secured by the employer or by unallocated retirement age to effectively create a market for their employer securities in the ESOP trust. The loan must stock and to diversify their investments while providing not allow recourse to allocated shares in the event of their employees with a benefit and promoting the default. The lender can be a bank, a regulated invest- continued independence of the business. ment company, the employer, or shareholders in the employing company. ESOP companies are permitted to assume an estate's tax obligation in return for an equal amount of employer Integration with Social Security--An ESOP established stock transferred from the estate to the ESOP. The tax after November 1, 1977, may not be integrated with may then be paid by the ESOP on more favorable terms, Social Security. generally over a 14-year period. In addition, an estate

January 1988 EBRIIssue Brief • 9 may deduct for tax purposes 50 percent of the qualified on the excess assets recovered from terminating defined proceeds from the sale of employer stock to an ESOP. benefit plans to the extent that the excess assets are Effective February 26, 1987, the 1987 budget reconcili- transferred to an ESOP. If the ESOP in turn buys stock ation bill provides that the deduction may be taken only from the employer, the cash infusion is tax free. The if the securities were owned by the decedent immedi- only "costs" are increased employee ownership and ately before his or her death, possibly dilution of previously issued shares.

Tax Deferral for Participants--As with other defined Current Trends in ESOP Use contribution plans, ESOP participants are not taxed on ESOP allocations to their accounts until they actually receive distributions. Until January 1, 1990, ESOP par- ESOP use has grown steadily over the last decade, ticipants who receive lump-sum distributions before according to several studies. The National Center for attaining age 59 1/2 are exempt from the 10 percent tax Employee Ownership (NCEO) estimates that by 1986 imposed on such distributions from other defined there were 8,046 employee ownership plans (including contribution plans. If dividends on ESOP stock are nontax-credit ESOPs, stock bonus plans, and money passed through in cash to participants, however, they purchase and profit sharing plans that invest in em- are taxed as current income, ployer stock but excluding tax-credit ESOPs), with 7.9 million employees participating. This represented a Asset Reversion Exemption--Through December 31, 1988, gain from the 1,601 plans covering just 248,000 employ- companies may avoid the 10 percent excise tax imposed ees in 1975 (chart 3).

•: Chart 3...... ::. . " • Cumulative Growth of Employee Ownership Plans'"' 1975-1986

9,000

7,000.

__...... i--_ ..... --- " I 4,000

3,000

2,000 -

1,000 -

0 75 76 77 78 79 80 81 82 83 84 85 86

I II Employees(in thousands) [] Plans I Source:NationalCenter for EmployeeOwnership,Inc. * Includesnontax-creditESOPs. stockbonusplans,and moneypurchaseandprofit-sharingplansthat invest inemployee stock. Doesnot includetax-creditESOPs.

10 • EBRIIssue Brief January 1988 The U.S. General Accounting Office (GAO) estimates ...... that as of March 1986, there were 4,799 ESOPs in 4,700 • i• ••••..... Table 1 companies, and 2,405 stock bonus plans, for a total of .i_i:_ii::PartlclpantSandAssets of ESOPs, 1983 7,204 employee ownership plans (GAO, 1986). GAO reports that 26 percent of ESOPs active in 1985 were tax- . ASsets

credit ESOPs, 16 percent were leveraged, 35 percent Ty_ : .... Participants Totals Median per were leverageable, and the remaining 22 percent were ...... ii (thousands) '{m Ilion) Participant nonleveraged (legally qualified to leverage, but with no .. • .... _..... provision for leveraging in the plan document). ".Tax-credit.. "6139_ $i4,800 i $2.952 •/everag_ •.... 1158 .. 1,450 8,660 Based on 1983 survey results, GAO estimates that Levorageab!e •: 293• ._:1.445 7,149 ESOPs active in 1985 covered 7.1 million participants N0n!everaged ...... "238 96I 5,098 and had assets of $18.7 billion. Tax-credit ESOPs accounted for 90 percent of the participants and 79 Total ...... 7,083 $18,860 $5,226 percent of the assets, but had the lowest asset value per -_ .... participant a median of $2,952. Leveraged ESOPs, . _$ourco: U.Si:_Govomment AcCOuntingOffiCe which accounted for 2 percent of participants and 8 percent of assets, had the highest median asset value per participant $8,660 (table 1). 40 percent of publicly traded companies with ESOPs, while manufacturing accounted for 27 percent. Only 7 The Bureau of Labor Statistics' 1986 employee benefit percent of the responding companies with ESOPs were survey found that 30 percent of full-time employees in publicly traded. medium and large firms, or about 7.2 million workers, participated in ESOPs (DOL, 1987). Twenty-eight Twenty-one companies with ESOPs, or 10 percent of percent participated in PAYSOPs; the remaining 2 those responding, were 100 percent ESOP owned. percent participated in other types of ESOPs. Less than Thirty-two percent of all the respondents were at least 0.5 percent participated in stock bonus plans, one-half ESOP owned, as were 47 percent of companies with leveraged ESOPs. Just I of the 14 publicly traded ESOP companies responding was more than 50 percent ESOP owned.

The Bureau of Labor Statistics' 1986 employee _ The Pros and Cons of ESOP Use benefit survey found that 30 percent of full- time employees in medium and large firms, or A broad range of issues must be addressed by those considering ESOP use. The goals of policymakers, about 7.2 million workers, participated in employers, and employees sometimes overlap and ESOPs. sometimes differ. Each group must ask to what degree ESOPs can achieve its desired goals and at what costs.

Questions policymakers face include:

The ESOP Survey 1987 covers a nonrepresentative Can ESOPs significantly broaden the ownership of sample but provides some insight into the widespread corporate stock? use and diverse design of ESOPs (ESOP Association, 1987). The survey identified ESOPs in 10 broad indus- Can ESOPs help corporate performance and, there- trial categories. Forty-two percent of surveyed compa- fore, U.S. economic competitiveness and growth? nies with ESOPs were in manufacturing. The banking and communications industries together accounted for Can ESOPs improve labor-management relations?

]anuary 1988 EBRI Issue Brief • 11 Can ESOPs save failing companies and boost declin- available on the attitudes of ESOP participants, employing industries? ers, and the public, and studies have been undertaken to ascertain whether employee ownership affects How beneficial are ESOPs to participants? corporate performance.

When does the participation of ESOPs in multi- Why Employers Sponsor ESOPs investor leverage buyouts represent an abuse? How are participants affected by these transactions? In its 1986 survey, GAO asked ESOP employers why their companies established ESOPs. (Respondents could What do ESOP tax advantages cost in forgone choose as many reasons as they deemed applicable.) revenue collections? The three reasons cited most frequently were (1) the Is an ESOP primarily an employee benefit or a tool of desire to provide an employee benefit, (2) the tax advantages afforded by ESOPs, and (3) the wish to corporate finance? improve employee productivity (chart 4). These were Employers must ask a number of questions, including: cited by 91 percent, 74 percent, and 70 percent of respondents, respectively. Only 3 percent indicated Can an ESOP boost company performance and that the ESOP was adopted in exchange for wage profitability? concessions. Just 4 percent cited saving a failing company as a reason, and only 5 percent cited protec- How would an ESOP affect employee attitudes and tion against hostile takeovers. labor-management relations? The most often reported advantages to having an ESOP Can an ESOP help defend a company against a were improved employee morale (66 percent) and tax hostile takeover? Is an ESOP a good financing tool savings (60 percent) (chart 5). Higher productivity and for other purposes? reduced turnover were each mentioned by about one- third of respondents; improved employee-management If an ESOP is adopted, will management lose control relations, capital for investment, and improved profita- of the company? bility each were reported by about one-fourth. The most-often cited disadvantages to having an ESOP, each Are the tax advantages of an ESOP substantial mentioned by 16 percent of respondents, were dilution enough to offset the costs of contributions, admini- of stock value and repurchase liability (chart 6). Fifty- stration, and (for closely held companies) repurchase seven percent indicated that there were no disadvan- liability? tages to having an ESOP.

Questions facing employees include: Among respondents who had terminated an ESOP, the How large a benefit will an ESOP provide? Is it reason given most often was adverse business condi- worth trading wages or pensions for an ESOP? tions (32 percent). Only 14 percent blamed the disadvantages of having an ESOP (chart 7). Will ownership provided by an ESOP make my job more satisfying? Will I have more say over my job The 1987 ESOP Association survey of 211 companies or other company matters? found that the factor most often cited as the single most important benefit of ESOP sponsorship was improved If my company is going to close, can an ESOP save employee motivation (39 respondents). Thirty-one my job? respondents mentioned the effect of ownership on business environment. Fifty respondents indicated that Recently, a great deal of research has been directed at the biggest problem associated with their ESOP was answering some of these questions. Information is now employee communications.

12 • EBRIIssue Brief January 1988 Cumulative Percent of all ESOPs: 0 10 ...... 120 30: 40 50 60 70 80 90 100

Employeebenefit Tax advantages Improveproductivity __-__-_:_--_-_ _ ._] Buy stockof major owner •:.:. :- _ I|J Reduceturnover -- __/////_1 I ...... • . .: .:...... Transfermajorityownershipto employees Raise capitalfor investment Decreaseabsenteeism Avoidunionization Make lessvulnerableto hostiletakeovers Save failingcompanyl Exchangeforwage concessions Take companyprivate Other

NumberofESOPs: 0 500 1,000 1.500 2,000 2,500 3,000 3,500

I Type of ESOP! = Leveraged [] Le_rageable I_'] Nonleveraged r7 Tax credit I

Ownership. :Washington; DC: GAO, 1986.

Empirical Evidence: How Do ESOPs Measure Up? the repeal of tax-credit ESOP provisions under TRA '86, the administration estimated losses from these plans Federal Revenue Loss from ESOPs According to GAO, under reformed tax rates to be just $665 million in 1987 the revenue losses attributable to ESOPs over the period and $230 million in 1988 (Executive Office of the 1977 to 1983 are between $12.0 billion and $13.3 billion. President, 1986, 1987). The Joint Tax Committee of Of these losses, $11.8 billion, or between 89 and 97 Congress projects that revenue losses from all ESOPs percent, are attributable to tax-credit ESOP provisions, (including tax-credit and other ESOPs) will decline from which expired year-end 1986. As the GAO report $0.8 billion in 1988 to less than $500 million by 1992 points out, ESOP tax incentives are designed, in part, to (U.S. Congress, 1987). broaden the ownership of corporate stock. In addition, they are intended to facilitate capital formation. The ESOPs and the Broadening of Capital Ownership---Owner- GAO provides evidence as to whether ESOPs are ship of capital in the U.S. is concentrated within a achieving these goals in sufficient degree to justify the relatively small fraction of the population. According to revenue losses. The study concluded that tax-credit the Joint Economic Committee of Congress, the top 10 ESOPs, in particular, represent a disproportionate percent of households, on the basis of wealth, held 90 revenue loss compared to the benefits realized, percent of household-owned corporate stock in 1983 (chart 8). Some contend that the skewed distribution is The Reagan administration had expected a revenue loss not consistent with U.S. ideals of social iustice and, of $2.6 billion from tax-credit ESOPs in 1987. Following therefore, regard broadened ownership as a goal in and

January 1988 EBRI Issue Brief • 13 AdvantagesofHavlngESOPsbyType of ESOP , :. :: : •: :...... 1

CumulativePercentofallESOPs: 0":::i ::?:- 10: ii " 20 " 30!::. 40 .: 50 " i.: :60 • 70 tl rnprovedemployeemorale: Taxsavings: Higherproductivity Reduoedturnover Bettermanagement-employeerelations Capitalforinvestment Improvedprofitability Decreasedabsenteeism - :Other None

NumberofESOPs: 0 ...... 500 i i.. 1000 " " 1500...... :2000... "12500 .:: :

of itself. Others argue in more practical terms that (GAO, 1986). GAO concludes that, as of 1983, ESOPs broadening ownership would provide greater economic had had relatively little impact on the distribution of opportunity to more people and might reduce, there- stock ownership in the economy. GAO attributes this, fore, the need for redistributional taxes and social in part, to the fact that ESOPs covered less than 7 programs. In addition, some point out that the U.S. percent of employees. market economy is driven primarily by consumption and that broadening ownership might financially ESOPs qualified to leverage had median account empower more consumers, spurring economic growth, balances per participant in 1983 ranging from $5,098 for nonleveraged ESOPs to $8,660 for leveraged ESOPs. Employee ownership in general, and ESOPs in particu- Total account balances of these plans were $3.9 billion, lar, are seen by some policymakers as a way to ap- while associated forgone revenue to the federal govern- proach their goal of broader ownership. But can ESOPs ment was between $0.2 and $1.5 billion over the preced- accomplish this goal? How much does the use of ing seven years. Tax-credit ESOPs provided a smaller ESOPs broaden ownership? Do ESOP participants median account balance per participant--just $2,952. become owners of substantial capital? This question is Tax-credit ESOPs" total account balances of $14.8 billion of particular interest to employees as well as poli- in 1983 are small compared to the $11.8 billion in cymakers, forgone revenue that they represented during the preceding seven years, according to GAO. According to GAO, ESOPs held about $18.7 billion in assets in 1983 (table 1). This is equivalent to about 1.9 Although ESOPs have had little impact on the distribu- percent of the total household-owned corporate stock tion of capital ownership in the economy, GAO con- that year, or less than 1 percent of all stock outstanding cludes that ESOPs do significantly broaden the owner-

14 • EBRIIssue Brief January 1988 ship of stock within the pool of employees who partici- ESOPs (GAO, 1986). These findings are supported by pate. Because ESOPs are subject to IlLS coverage and Marsh and McAllister (Rosen, Klein, and Young, 1985), nondiscrimination rules, ESOP participation cannot be who found that 10-15 percent of ESOP companies are limited to any special group of employees. Nor can an more than 50 percent employee owned. Rosen, Klein, ESOP provide disproportionately large benefits to and Young have suggested that estimates of current highly compensated individuals. (In addition to ownership share among ESOPs may be misleading general nondiscrimination requirements, ESOPs cannot because ownership share generally increases over time be integrated with Social Security.) According to GAO, (Rosen, Klein, and Young, 1985). The 1987 ESOP the median rate of employee participation for all ESOPs Association survey identified 21 closely held companies is nearly 71 percent. (For tax-credit ESOPs, the median that were 100 percent employee owned. Seventeen of rate, 63 percent, is somewhat less than for other types.) these sponsored leveraged ESOPs. The survey further Thus, GAO concludes that "assuming that the employ- identified 45 ESOP companies, including one publicly ees of firms with ESOPs include workers who differ traded company, that were between 50 and 99 percent widely in levels of wealth and income, then the high employee owned. proportion of these workers participating in stock t ownership through ESOPs suggests that these plans do ESOPs and Benefit Levels--The effectiveness of ESOPs in broaden stock ownership within sponsoring firms." providing capital ownership can also be viewed in terms of the account balance that might be accrued over " The degree of ownership resulting from ESOP use can the career of a typical participant. Based on data also be measured by the share of ESOP ownership in obtained from ESOP practitioners, NCEO projected that sponsoring companies. GAO found that only 25 an employee earning the 1983 median wage of $18,000 percent of ESOPs held more than a 25-percent owner- per year would accumulate $31,000 worth of stock in ship share in the sponsoring company. Forty-four the average ESOP in 10 years (Feldman and Rosen, percent of leveraged ESOPs held more than 25 percent 1985). After 20 years, the same employee would have of their companies, as did just 5 percent of tax-credit an account value of over $124,000. Quarrey contends

Dilute value of stock Repurchase liability Lose control of company Poor performance of stock Difficulty getting loans Other None

NumberofESOPs: 01.. 200 400 600: 800 1,000_1,200 1,400 1,600 1,800 2,000

JTypeof:i_SOPi ::=Leveraged ....I_lLeverageable: ::.l:_JNonleveraged I-I Tax credit J

Source: U.S. General AccountingOffice_ Employee Stock OwnerShip Plans: Benefits and Costs of TaxIncentives for Broaden- ing Stock.Ownership. Washington, DC_;GAO. 1986.

January 1988 EBRI Issue Brief 4. 15 Chart 7 Reasons for Terminating, Converting, or Discontinuing Contributions toanESOP by Type of ESOP

CumulativePercent of all ESOPs: 0 5 10 15 20 25 30 35 40 45 50 55 60

Dilute value of stock .i i i - - I i i I ..... Repurchase liability Lose control of company I_ Poor performance of stock [] Difficulty getting loans Other • None _:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::: :::::::::::::::::::::::: ] Number of ESOPs: 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000

ITypeofESOP=L: everage[] Ldeve,age[] Nonabio everaged[] Taxcr]ed,

Source: U.S. General Accounting Office. Employee Stock Ownership Plans: Benefits and Costs of Tax Incentives for Broad- ening Stock Ownership. Washington, DC: GAO, 1986. that this represents a significant benefit, particularly owned, Logue and Rogers project median account when viewed in the context of the median net financial values comparable to NCEO's--$24,000 after 10 years assets of a family at retirement age (excluding home and $100,000 after 20 years. Neither NCEO nor Logue equity), which he reports to be $11,000. Quarrey and Rogers adjust projected account balances for suggests that these findings are not inconsistent with inflation. Although both sets of projections are based the lower median per participant account values on nominal stock growth during periods of relatively reported by GAO, because GAO figures relate to low inflation, inflation-adjusted estimates would be current account balances while the NCEO estimates somewhat lower. Adjusting for inflation beginning reflect projected future values, and because many of the when distributions are made, an account balance of ESOPs studied by GAO had been in existence for only a $100,000 with a real interest rate of 2 percent could few years (Quarrey, 1986). provide 20 annual payments of about $6,000 constant dollars. (For a discussion of benefit levels realized Logue and Rogers have suggested that estimates such under different retirement arrangements and circum- as Quarrey's might be too optimistic, because ESOPs stances, see EBRI, "Pension Portability and What It Can with high contribution rates might be more likely to Do for Retirement Income: A Simulation Approach," participate in studies than those with lower rates EBRI Issue Brief 65 (April 1987).) (Logue and Rogers, 1987). In a survey of Ohio ESOPs that enjoyed a 61 percent response rate, they found These projections are generally based on average contribution rates significantly lower than those that contributions and average stock value growth and, underlie NCEO estimates. They project median account therefore, fail to encompass the special circumstances values for a worker earning $18,000 per year to be that might be faced by a participant receiving a distribu- $12,500 after 10 years and $40,600 after 20 years. How- tion immediately after a large decline in the value of ever, in alternative estimates based on only those employer stock. The volatility exhibited by the stock companies that are more than 30 percent employee market during October 1987 highlights this concern.

16 • EBRIIssue Brief January 1988 at ,o G._O,C1 D.terminationreasons

ReasonsforTernminating,Converting,or DiscontinuingContributionstoan ESOPby TypeofESOF

CumulativePercentof All ESOPs: 0 5 10 15 20 25 30 35 i i Adversebusinessconditions _///////////////////////////A I BurdensofERISA I Endof TRASOPcredit== I Disadvantageosf ESOPs I Merger_,,=_-///x,_/A I Changein ownershipw_.//////////A I Liquidationof company_ I Collectivebargainingagreement[] Other . _//',/////////////Y.,_ I NumberofESOPs: 0 i0 40 60 8"0 100 120 140 160 1K) 200 2½0 240 260 B

of ESOP: I Type [] Taxcredit [] Nonleveraged• Leverageable• Leveraged I

Page 1 The existence of such risks could reduce the value of an ESOPs as Retirement P/ans--The use of ESOPs as retire- ESOP as an employee benefit--particularly as a retirement income vehicles has been criticized on at least two ment plan. This issue is discussed in more detail below, grounds: (1) the inadequacy of benefits provided, 4 and (2) the inherent riskiness of concentrated investment in In evaluating the level of benefits provided to ESOP employer stock as compared to the diversified invest- participants, GAO also considered the payment of ment of other qualified defined contribution retirement dividends on ESOP stock. Overall, 32 percent of ESOP plans. The greater risk of ESOP investments is an companies paid dividends to ESOPs on a continuing important issue, particularly in light of recent stock basis; 58 percent never paid dividends. Among ESOPs market volatility. paying dividends, only 8 percent passed through dividends paid before June 1984 to participants, while Some ESOP portfolios suffered large losses in the 86 percent retained those dividends in the plan trust. October 1987 market decline. The ESOP owning 32 (Eight percent had not paid dividends before June percent of the publicly traded FMC corporation lost 1984.) In 1984, DEFRA provided for the deduction of $239 million, or 32 percent of total ESOP value, between dividends passed through to participants. Despite that October 15 and 27. During that same period, the ESOP incentive, in late 1985 only 5 percent of those ESOPs owning 30 percent of Lowe's Companies, often praised that had retained dividends before June 1984 had begun passing them through to participants (chart 9). 4 Potential benefit levels from ESOPs are discussed above.

Assel a_

Corporate stock! Trusts Businessassets Bonds IRAs and Keoghs Money market accounts Land contracts Certificates of deposit Real estate Checking accounts Insurance cash surrender value Savings accounts Automobiles Miscellaneous Gross assets

0 10 20 30 40 50 60 70 80 90 100 I• Topo.s%[] Nex0.5%t [] Next90/,,,I

Source: EBRI tabulations based on Joint Economic Committee data, as revised and reported by the General Accounting Office. I Excludes stock in pension trusts. * Top 10 percent of U.S. households.

January 1988 EBRI Issue Brief • 17 Cumulative Percentage of All ESOPs

Overall

Tax credit

Nonleveraged

Leverageable

Leveraged

0 10 20 30 40 50 60 70 80 90 100

• Dividendsfirst [] Dividendsfirst [] Dividendsretained [] Nodividends paid distributedto distributedto inplan trust participantsprior participants to DEFRA after DEFRA

Source: EBRI tabulationsbased on GeneralAccountingOfficedata, by ESOP advocates for the very high account balances market volatility. In addition, publicly traded compa- realized by some rank-and-file participants, lost $73 nies appear to provide only supplemental benefits million, or 26 percent (Dutton and Robertshaw, 1987). It through their ESOPs. While an estimated 1,000 publicly is likely that a significant proportion of ESOP partici- traded companies sponsored ESOPs in 1983, these pants in publicly traded companies saw their account included 700 tax-credit ESOPs, which had a median balances fall by 20 percent or more. (The Standard & per-participant account balance of only $2,952. Among Poor's 500 Index fell by 22 percent in October.) If stock other ESOPs in publicly traded companies, the median prices recover, most ESOP participants will regain these balance was just $1,464 (Blasi, 1987). Although account losses. However, participants receiving distributions balances in these ESOPs might be expected to grow, it immediately after stock price declines face a difficult appears that most of the participants do not currently choice between holding the stock and hoping it will have a substantial amount to lose. recover its value, or selling the stock and accepting the loss. The issue of ESOP risk was addressed by TRA '86, which required provision for partial diversification of Stock market volatility probably has less impact on the accounts of qualified participants nearing retire- most ESOP participants than on most other investors, ment. But this requirement addresses neither the risk however. The majority of ESOPs (although not the facing participants who are not yet qualified for diversi- majority of ESOP participants) are in closely held fication nor the 50 to 75 percent of qualified employee companies that do not trade stock on public markets, account balances that might remain undiversified. and whose stock may be less affected by occasional ESOPs thus remain a more risky retirement income

18 • EBRIIssue Brief January 1988 vehicle than other qualified retirement plans, although new, additional employee benefit. Thirty-four also proposed Labor Department regulations may change maintained pension plans; profit sharing and 401(k) the diversification requirements of defined contribution plans were each sponsored by 18 ESOP companies. plans, including ESOPs (detailed in "Legislative and Fifty-eight of the ESOPs involved no current or future Regulatory Initiatives"). wage concessions (Logue and Rogers, 1987).

ESOPs, Participation, and Employee Attitudes--ESOP advocates often contend that ESOP use can improve employee-management relations. Some contend that The issue of ESOP risk was addressed by TRA endowing employees with an ownership share in the '86, which required provision for partial diver- company where they work will favorably affect employee attitudes and enhance company performance. sification of the accounts of qualified partici- Others suggest that employee ownership should go pants nearing retirement, hand in hand with increased employee participation in corporate decision making, as part of a consistent philosophy of employee ownership, and that the combination of ownership and employee participation can favorably affect employee attitudes and corporate Advocates argue that, despite inherent risks, ESOPs can performance. have a legitimate role as an employee benefit. The risk might not be severe in companies that provide ESOP ESOPs and Employee Participation--According to GAO, participants with other retirement income protection, most ESOPs have not led to greater employee partici- In fact, only a small fraction of ESOPs trade wages or pation in company decision making. Sixty-eight pensions for employee ownership. GAO found that just percent of ESOP companies reported employee involve- 3 percent of ESOPs were established in exchange for ment in company decision making to be about the same wage concessions. The Labor Department reports that as before the ESOP was established. Only 27 percent in 1986, among all full-time participants in retirement indicated that the involvement had increased. Among and capital accumulation plans in medium and large those reporting increased involvement, only 23 percent firms, just I percent relied on an ESOP or stock bonus reported that participation occurred through formalized plan alone. In contrast, 29 percent participated in a channels, such as committees or task forces. More than defined benefit or money purchase pension plan in three-quarters indicated that the increased involvement addition to an ESOP or stock bonus plan. Another 2 took place informally, through casual meetings or percent or more participated in a profit sharing or conversations. Notably, 42 percent of leveraged ESOPs, savings and thrift plan in addition to an ESOP or stock more than any other type, reported increased involve- bonus plan (U.S. Department of Labor, 1987). The 1987 ment through formal structures. Where committees or ESOP Association survey identified just 23 ESOPs that task forces existed, 42 percent provided for employee had been converted from pension plans, compared to 79 input into decisions involving safety, compared to 34 converted from profit sharing plans, and 133 which percent for those involving working conditions, 33 were not the result of a plan conversion. Sixty-three percent for management-employee relations, 30 percent respondents indicated that their ESOP was currently for cost reduction, and 19 percent for product quality. supplemented with a defined benefit pension plan, 45 In contrast, input into decisions involving new prod- with a profit sharing plan, and 52 with a 401(k). Five ucts, corporate planning, and budget or finance were respondents indicated that wage or benefit concessions reported by only 14, 13, and 11 percent of ESOPs, had been made in exchange for the ESOP, compared to respectively. Thirty-three percent indicated that 233 reporting no reductions in other compensation, employees had no input into company decisions. For Logue's 1986 study of Ohio ESOPs similarly found that those that reported some input, 95 percent of ESOP only 3 ESOPs out of 63 were converted from pension companies indicated that employees could make plans and that 46 companies established the ESOP as a suggestions, while 33 percent reported that employees

]anuary 1988 EBRIIssue Brief • 19 shared decision making with management. Only 10 pation groups was not strongly related to employee percent indicated that employees could make some satisfaction, though workers' perceptions that they have managerial decisions on their own. influence was.

Of the 211 ESOP companies responding to the 1987 ESOPs and Corporate Performance--In a later NCEO ESOP Association survey just 28 indicated that employ- study, Quarrey sought to evaluate whether ESOPs ees gained more involvement in corporate policy affect corporate performance and, if so, what character- decisions. Fifty-two indicated that employees have istics distinguished more effective ESOPs from less more direct input on job-related issues, 87 reported that effective ones (Quarrey, 1986). The study is divided management met more with employees, and 143 into two parts. In the first part, data for 45 ESOP indicated that they now provided more financial companies for five years prior to ESOP adoption are information to employees, compared to 1985 (post-ESOP adoption) data. In addition, each company in the sample is matched to O O O similar non-ESOP companies as a control group to - evaluate the impact of ESOP adoption on corporate performance. The second part of the study relies on The single most important factor in boosting more detailed post-ESOP adoption data for 30 compa- employee satisfaction with their ESOP and nies to assess what factors might contribute to making with their employment situation, notes an ESOPsuccessful. NCEO, was the size of the company contribution to the ESOP. The study found that after the ESOPs were adopted, companies with ESOPs realized employment growth 5.05 percentage points higher than the control group. In • • contrast, before adopting an ESOP, employment growth of the ESOP companies exceeded that of the control

ESOPs and Employee Attitudes In a recent study, NCEO group by just 1.21 percentage points (table 2). evaluated the effect of ESOP use on employee attitudes The second part of the study concluded that employee (Rosen, Klein, and Young, 1985). NCEO interviewed participation in decision making, as measured by the 2,800 employees in 37 ESOP companies over four years. presence of formal participation groups and perceived In general, the study found that employees endorse the worker influence, was the strongest determinant of the idea of ownership and appreciate the financial benefits it provides. Employees also report that the ESOP encourages them to stay with the company. However, Table 2 employees generally do not report improved employee- Average Percentage Point Difference management relations, nor do they report that the ESOP between Performance of ESOP motivated them to work harder, or that the ESOP made and Conventional Companies, their job more satisfying. Furthermore, employees before and after ESOP Adoption tended to disagree with suggestions that the ESOP Performance Before After improved their status relative to that of managers or Measure ESOP ESOP that the ESOP provided them greater involvement in decision making. Employment growth 1.21 5.05 Sales growth 1.89 5.40 The single most important factor in boosting employee satisfaction with their ESOP and with their employment Source: Michael Quarrey, Employee Ownership and Corpo- situation was the size of the company contribution to rate Performance. National Center for Employee Ownership the ESOP. Another important factor was management's research papers on employee ownership. Oakland, CA: self-reported commitment to employee ownership as a Nat ona Center for Employee Ownership, 1986. corporate philosophy. The existence of formal partici-

20 4, EBR| Issue Brief January 1988 ESOP's impact on corporate performance. Management ate conclusions about the benefits of ESOP sponsorship commitment to a philosophy of employee ownership overall, it also served to highlight the differences among was also important. While confirming the finding of ESOPs. the earlier NCEO study that the size of the company contribution to the ESOP influences employee attitudes The 1987 ESOP Association survey findings are consis- most, Quarrey's study concluded that contribution size tent with these results. Improved productivity was is not an important determinant of the ESOP's impact reported by three-fourths of respondents, while the on corporate performance, remainder reported no impact or were not sure. None reported a negative impact. Forty-six percent of the respondents believed that the ESOP had enhanced their competitiveness, 19 percent believed it had not, and 35 percent were unsure. Logue's study of Ohio ESOPs also concluded that ESOP companies outperform their indus- A recent GAO study, however, found little evidence that ESOPs affect corporate performance (GAO, 1987). tries in terms of profit and employment GAO analyzed the profitability and productivity of111 growth, generally representative companies that established ESOPs from 1976 to 1979. Data for the year the ESOP was established were compared to data for the two preceding and three subsequent years. Data on a control group of similar companies without ESOPs Logue's study of Ohio ESOPs also concluded that ESOP were used for comparison. GAO concluded that in the companies outperform their industries in terms of profit sample overall, ESOP establishment had no statistically and employment growth (Logue and Rogers, 1987). In significant effect on corporate performance. However, terms of profits, twenty ESOP companies outperformed the report confirms Quarrey's finding that increased their industry as a whole, while only nine did worse, employee participation in corporate decision making Eighteen ESOP companies outperformed non-ESOP has a positive impact on the performance of ESOP companies in their industries in employment growth, companies. while just two did worse, s GAO's failure to confirm the overall positive impact of In contrast to the NCEO study, Logue found that ESOP establishment reported by Quarrey and others contribution levels were the most important determi- might be explained in part by the composition of GAO's nant of ESOP impact on corporate performance. How- sample and the design of GAO's study. The GAO ever, he also found a strong relationship between sample is larger and probably more representative of all worker involvement in decision making and ESOP ESOPs in existence at the time of the study than is impact. He concludes that high involvement and large Quarrey's. Therefore, GAO's findings might more contributions are highly correlated and that separating accurately reflect the historical impact of a "typical" their effects is difficult. ESOP. However, Quarrey's study, which included a potentially biased sample but also used a control group, Logue's study enjoyed a higher response rate (61 may provide useful insight into the potential impact of percent) than most other studies of ESOP performance, an ESOP that provides more generous contributions He suggests that for this reason his sample included and a larger ownership share. more ineffective ESOPs. While this led to more moder- In some respects, GAO's analysis of profitability (after- tax return on assets) and productivity (the ratio of 5 Losu e points out, however, that these results were based on value-added to labor compensation) might better reflect the appraisals of ESOP company managers, not on actual corporate performance than Quarrey's focus on em- industry or matched company data. ployment and sales growth. However, because ESOPs

January 1988 EBRIIssue Brief _ 21 are usually established as add-on benefits (with no offsetting reduction in other compensation), GAO's Table 3 focus on profitability may neglect some "profits" Income and Expenses for First Year Following passed on to participants in the form of ESOP contribu- Financing Of $10 Million Capital Expansion, under tions. In addition, add-on ESOP contributions could Conventional Debtand Leveraged ESOP Financing depress GAO's measure of productivity. Laveraged Conventional ESOP Debt The GAO report points out that recent changes in tax incentives not reflected in the study, including the Operating Profit $7.000,000 $7,000,000 elimination of tax-credit ESOP provisions (typically used by lower-benefit ESOPs) and increased incentives for leveraged ESOPs (which typically provide higher ESOP debt 800,000 n/a benefits), could lead to "dramatic" changes in ESOP ESOP Contribulion 1,000,000 ..... n/a benefits. Finally, all comprehensive studies of ESOPs to date include many ESOPs that have been in existence Pretax Income 5.200,000 " 6.000,000 for five years or less and may, therefore, fail to fully COrporate Taxes 1,779,750 2,051,750 capture the potential longer-term impact of ESOP Principal Repayment n/a 1.000,000 sponsorship. Net Income $3.420.250:::: $2.948,250

An ESOP As a Financing Tool--A leveraged ESOP can Source: Robert V. Gage, "Employee Stock Ownership Plans," serve as a powerful tool of corporate finance. Due to BookeMarks(November 1987). favorable tax treatment, an ESOP can provide funds for investment at below-market interest rates and allow liberal deductions for payback of both interest and different investors pay different prices for the same principal. Thus, under some circumstances, capital class of stock. expansion might be most effectively financed using an ESOP. For example, assuming a 10 percent interest rate ESOPs in particular might be asked to pay higher stock for conventional debt and an 8 percent rate for an ESOP prices than other investors due to the distinction some loan, a company seeking to finance a $10 million capital draw between cash investment and an ESOP invest- expansion and amortize the loan over 10 years could ment based on future corporate contributions. Because realize a $472,000 increase in net income for the first the ESOP often tenders a note rather than cash, and the year by using an ESOP rather than conventional debt note is dependent on employer contributions, the note (Gage, 1987) (table 3). is often discounted from its face value at closing, resulting in dilution of the ESOP's interest in the A leveraged ESOP, which can acquire a large block of transaction and, therefore, a higher price for the ESOP. stock at one time, can participate in a multi-investor leveraged buyout. ESOP participation in such a trans- ESOP fiduciaries, like those of other qualified employee action raises issues in fiduciary responsibility and has benefit plans, must invest prudently and for the sole recently gained the attention of policymakers, as benefit of plan participants. Multi-investor buyouts described below, may create potential conflicts of interest for fiduciaries. For example, other investors, who might include ESOPs in Multi-investor Leveraged Buyouts management, stand to gain if the ESOP pays a disproportionately higher price for the same class of stock. Multi-investor leveraged buyouts are transactions in Such conflicts could lead to fiduciary violations and which two or more investors simultaneously purchase participant losses, particularly if the stock price paid by large shares of stock in the same target company, the ESOP is inflated more than adequate consideration Because of the varying circumstances of the investors of the investors' different circumstances dictates. involved, due consideration sometimes requires that Furthermore, perceptions of ESOP participants that

22 • EBRIIssue Brief January 1988 they paid more than other investors for the same stock The Labor Department should remain neutral could lead to dissatisfaction with the plan and animos- regarding the participation of ESOPs in multi- ity toward management. And if the price paid greatly investor leveraged buyouts. exceeds the value of the stock, the forgone federal revenue may be disproportionately large compared to The department should strongly recommend the the amount of benefit provided to participants. Man- appointment of an independent fiduciary and inde- dating price parity might preclude ESOP participation pendent financial and legal advisors to negotiate on in many leveraged buyout transactions, however, behalf of the ESOP and to have a say of approval because it would decrease the return expected by non- over the transaction, in order to help ensure fair ESOP investors, treatment of the ESOP and participants in relation to other investors. Recently, the Labor Department stopped a proposed buyout of the Scott & Fetzer Company before it was The department should provide for a preclosing safe completed. The Scott & Fetzer ESOP was to pay $182 harbor, which would prohibit pretransaction inter- million for a 41 percent interest in the company. The vention by the Labor Department as long as certain company was valued at between $80 and $100 million; conditions designed to protect ESOP participants the ESOP's interest would have been worth between were met. These conditions would be (1) the use of $32.8 and $40 million. Management investors and an independent fiduciary and independent financial investment bankers would have acquired a 29 percent and legal advisors; (2) the provision that in transac- ownership share for an investment of just $9 million tions immediately diluting ESOP stock, an amount (Lerner, 1985). The Labor Department determined that equal to the carried interest of management investors this transaction was prohibited under ERISA because be held in escrow for a specified time, to be extended the fiduciary had not acted in the best interests of the if the Labor Department later investigates; if the de- participants, partment finds that the ESOP paid more than adequate consideration, the carried interest would be Some observers believe that the intervention of the available to the ESOP as compensation; and (3) the Labor Department in this transaction has made invest- requirement that notification be provided prior to ment bankers reluctant to include ESOPs in multi- closing of the intent to use the safe harbor. investor leveraged buyouts. Many ESOP supporters advocate ESOP participation in these transactions, The Labor Department should consider other arguing that workers should have the opportunity to safeguards to protect participants. compete with other investors for ownership of the company for which they work. However, some believe Legislative Developments--The Tender Offer Disclosure that regulation is needed to ensure fair treatment of and Fairness Act of 1987 (S. 1323), reported by the ESOP participants in relation to other investors. Pro- Senate Banking Committee, contains two provisions posed regulations and legislation addressing these that would enhance the attractiveness of ESOPs in issues are discussed in the following section, takeover situations. First, the bill would extend the statutory tender offer period from the current 20 days to 35 days. For a company at least 10 percent employee- Legislative and Regulatory Initiatives owned for the last six months, the period would be extended to 95 days if the ESOP announced its intent to ESOPs in Multi-investor Leveraged Buyouts make a competing bid. Second, the bill would allow ESOPs to use surplus assets from a defined benefit Regulatory Developments--The ERISA Advisory Council pension plan to finance its bid. These assets would not made recommendations to the Department of Labor be available to any other bidder. regarding regulation of ESOP participation in multi- investor leveraged buyouts. The recommendations are These provisions reflect the Senate Banking summarized below. Committee's intent that employees should have the

January 1988 EBRI Iss_xeBrief _ 23 advantage in takeover struggles, or at least have the only if the participant were offered a broad range of in- means to compete fairly with high-powered outside and vestment alternatives and were provided sufficient in- management investors. While critics see the provisions formation to make informed decisions. In addition, the as an invitation for ESOP abuse, proponents respond participant's exercise of control would have to be that even abusive intent on the part of management "independent," or without influence from a plan may not preclude an outcome of expanded employee fiduciary or sponsor. ownership that is beneficial to employees. The Outlook for ESOPs ESOPs in Floor-offset Plans Since the passage of ERISA in 1974, ESOPs have gener- Under a floor-offset plan, an employer sponsors a ally enjoyed expanded favorable tax treatment under defined contribution plan, under which benefit levels federal law. Some in Congress see ESOPs as a prime vary with investment returns. In addition, the era- target for revenue increases. In addition, some perceive ployer promises a minimum benefit level, expressed by that ESOPs are frequently abused and provide dubious means of a benefit formula, and sponsors a defined benefits. An earlier House Ways and Means Committee benefit plan, or "floor plan." If a participant's defined revenue proposal would have drastically curtailed contribution plan account balance is not sufficient to ESOP tax advantages. (The proposal was omitted from pay the minimum benefit due, the floor plan makes up budget reconciliation legislation.) the difference. In addition, the general response of organized labor to Some policyrnakers are concerned that the use of ESOPs ESOPs continues to be lukewarm at best. Unions may in floor-offset arrangements might jeopardize the fear that employee ownership will undermine the benefit security of participants. ESOPs are exempt from adversarial management-employee relationship. And restrictions that prohibit defined benefit plans from skepticism exists as to how beneficial ESOPs are to investing more than 10 percent in employer stock, union members, particularly when they are offered in Instead ESOPs must invest at least 51 percent and can exchange for wage or other concessions. An August 18, invest up to 100 percent in these securities. If the value 1987, statement by the AFL-CIO Executive Council of employer stock drops, floor plans might be hard stressed that "any proposal to 'pay" for participation in pressed to pay the minimum promised benefits, an ESOP with collectively bargained benefits should be weighed with particular care" (AFL-CIO, 1987). A set Under the budget reconciliation, the defined contribu- of guidelines for negotiating an ESOP issued by the tion and defined benefit portions of a floor-offset plan AFL-CIO industrial union department emphasizes established after December 17, 1987, are treated as one ESOPs' riskiness as a retirement vehicle relative to plan for purposes of the 10 percent limit on investment defined benefit pension plans, the importance of in employer securities. The act also tightens restrictions employee involvement in decision making, and the on what type of employer securities these plans may importance of an equitable allocation of stock and invest in. Because ESOPs must be invested primarily in voting power, among other factors. employer securities, these provisions will severely limit the use of ESOPs in floor-offset arrangements. Nonetheless, recent survey results suggest that public perceptions of ESOPs are favorable. A survey of 1,001 Other Initiatives individuals conducted in August 1987 for the Bureau of National Affairs (BNA) and NCEO provides insight into The Labor Department has proposed regulations that current public perceptions regarding employee owner- may affect diversification of ESOP accounts (Federal ship (BNA/NCEO, 1987). Eighty-one percent of those Register, 1987). Currently under ERISA, fiduciaries are surveyed thought employee owners paid more atten- generally relieved of liability for investment outcomes tion to quality than other workers, and 69 percent of participant-directed accounts (most defined contribu- believed that employee owners worked harder. Eighty- tion plans) if participants exercise control over their in- one percent thought employee owners were more dividual accounts. Under most interpretations of the concerned with their company"s financial performance. proposed regulations, this relief would be available One-half indicated that they would be willing to forgo

24 • EBRIIssue Brief January 1988 their next wage increase for a share of ownership in Widespread support of employee ownership is also their company. Forty-one percent indicated that they reflected by state laws that support the concept. At would rather buy a similar product from an employee- least 19 states have already passed employee ownership owned company than from a conventional company (51 laws (chart 10), and legislative activity at the state level percent said ownership made no difference), continues. At the federal level, Congress is likely to

Washington •

January 1988 EBRIIssue Brief 4, 25 further regulate ESOPs to discourage possible abuses In addition, current legal provisions allowing ESOPs to and promote "good" ESOPs. However, continued borrow money on a tax-favored basis continue to make congressional support for the ESOP concept is likely. ESOPs an attractive tool in corporate financing strate- gies. A large decrease in the number of ESOP participants is expected to result from the elimination of tax-credit _- References ESOPs effective as of year end 1986. A March 1987 AFL-CIO Executive Council. Statement on Employee Stock survey of tax-credit ESOP companies by Hewitt Associ- Ownership Plans (ESOPs). Washington, DC: AFL- ates found that only 2 percent of the 125 respondents intended to continue to make contributions to the plan CIO, 1987. without the tax credit (those contributions would be Blasi, Joseph Raphael. Employee Ownership Through deductible). However, another 27 percent were unde- ESOPs: Implications for the Public Corporation. Work in cided (Hewitt Associates, 1987). As reported earlier, America Institute Studies in Productivity No. 48. tax-credit ESOPs accounted for 90 percent of ESOP New York, NY: Pergamon Press, 1987. participants in 1983. However, ESOP advocates con- Bureau of National Affairs. "Comparison of Proposals tend that these statistics may overstate the setback for for the Termination and Funding of Defined Benefit employee ownership, because tax-credit ESOPs have Plans." BNA Pension Reporter 14 (26 October 1987). generally provided smaller ownership benefits than Bureau of National Affairs and National Center for Employee Ownership. Employee Ownership Plans: other ESOPs. How 8,000 Companies and 8,000,000 Employees Invest in Their Futures. Washington, DC: Bureau of National Despite the repeal of tax-credit ESOP provisions, employer interest in ESOPs is likely to continue because Affairs, Inc., 1987. the broad tax advantages still available make the ESOP Dutton, Jacqueline, and Nicky Robertshaw. "ESOPs attractive as a compensation supplement and as a tool Take a Bath: Market Socks Defined Contribution of corporate finance. Emerging evidence that well- Plans," Pensions and Investment Age 15 (2 November structured ESOPs can favorably affect employee atti- 1987); and unpublished estimates from Nicky tudes and corporate performance might further spur Robertshaw. Employee Benefit Research Institute. Fundamentals of employer interest in the ESOP concept. Employee Benefit Programs, 3d. ed. Washington DC: Employee Benefit Research Institute, 1987. @ Summary __. "Pensions Portability and What It Can Do for Retirement Income: A Simulation Approach." EBR/ Spurred by congressional enactment of tax incentives, Issue Brief65 (April 1987). ESOP use has grown rapidly since 1974. However, The ESOP Association. The Employee Stock Ownership available data suggest that many of these ESOPs, Association Tenth Annual Convention. Washington, covering the bulk of ESOP participants, provide only DC: The ESOP Association, 1987. modest benefits and little opportunity for increased ESOP Survey 1987. Washington, DC: The ESOP employee participation, and that they usually coexist _" with other retirement plans. Yet, a growing body of Association, 1987. evidence suggests that well-structured ESOPs can have Executive Office of the President. Office of Management and Budget. Special Analyses of the Budget of the United a positive impact on employee attitudes and corporate States Government: Fiscal Year 1987. Washington, DC: performance. U.S. Government Printing Office, 1986. ESOPs may not compare favorably with other qualified _ .Special Analyses of the Budget of the United States retirement plans as a vehicle for retirement income Government: Fiscal Year 1988. Washington, DC: U.S. because their concentrated investments may entail more Government Printing Office, 1987. risk. Nonetheless, ESOPs have the potential to broaden Feldman, Johathan, and Corey Rosen. Employee Benefits in Employee Stock Ownership Plans; How Does the capital ownership, improve employee motivation, and Average Worker Fare? Arlington, VA: National Center provide a substantial financial benefit to participants, for Employee Ownership, 1985.

26 4, EBRIIssue Brief January 1988 Gage, Robert V. "Employee Stock Ownership Plans." Quarrey, Michael. Employee Ownership and Corporate BookeMarks 11 (November 1987). Performance. National Center for Employee Owner- Gilman, Nicholas Paine. Profit Sharing Between Employer ship research papers on employee ownership. and Employee. New York, NY: Houghton Mifflin Co., Oakland, CA: National Center for Employee Owner- 1889. ship, 1986. Hewitt Associates. PAYSOP Treatment After Tax Reform. Quarrey, Michael, Joseph Blasi, and Corey Rosen. Lincolnshire, IL: Hewitt Associates, 1987. Taking Stock: Employee Ownership at Work. Cam- Ivancic, Catherine, and John Logue. Employee Owner- bridge, MA: Ballinger, 1986. ship and the States: Legislation, Implementation, and Rosen, Corey. "The Future of Employee Stock Owner- Models. The Employee Ownership Project, Depart- ship Plans." Pension Briefings 4 (April 1987). ment of Political Science, Kent State University. Kent, Rosen, Corey, Katherine J. Klein, and Karen M. Young. Ohio: Kent Popular Press, 1986. Employee Ownership in America: The Equity Solution. James, Gordon, et al. Profit-Sharing and Stock Ownership Lexington, MA: D.C. Heath and Company, 1985. for Employees. New York, NY: Harper Brothers, 1926. U.S. Congress. Joint Committee on Taxation. Estimates Kelso, Louis O., and Patricia Hetter Kelso. Democracy of Federal Tax Expenditures for Fiscal Years 1988- and Economic Power: Extending the ESOP Revolution. 1992, JCS-3-87. Prepared for the Senate Finance and Cambridge, MA: Ballinger, 1986. House Ways and Means Committees, 27 February Korczyk, Sophie. "Employee Stock Ownership and 1987. Washington, DC: U.S. Government Printing Recent Policy Changes." Peat Marwick Spectrum 9 Office, 1987. (November 1986). U.S. Department of Labor. Bureau of Labor Statistics. Lerner, Charles, U.S. Department of Labor, letter to Employee Benefits in Medium and Large Firms, 1986. Wilson H. Ellis, Jr., July 1985. Washington, DC: U.S. Government Printing Office, Logue, John, and Cassandra Rogers. Employee Stock 1987. Ownership Plans in Ohio: Impact on Company Perform- U.S. General Accounting Office. Employee Stock Owner- ance and Employment. Prepared for presentation at ship Plans: Benefits and Costs of Tax Incentives for the National Center for Employee Ownership's Sixth Broadening Stock Ownership. Washington, DC: GAO, Annual Conference on Employee Ownership and 1986. Participation, Los Angeles, 26-28 March 1987. U.S. General Accounting Office. Employee Stock Employee Ownership Project, Department of Politi- Ownership Plans: Little Evidence of Effects on Corporate cal Science, Kent State University. Performance. Report to the Chairman, Committee on National Center for Employee Ownership. The Employee Finance, U.S. Senate. Washington, DC: GAO, 1987. Ownership Report (March/April 1986, September/ October 1987). _."Over 500,000 Workers Added to Employee Ownership Plans in 1986." Press release, 12 June 1987. Profit Sharing Research Foundation. Cumulative Growth in Number of Qualified Deferred Profit Sharing Plans and Pensions in the United States 1939 Through 1984. Evanston, IL: Profit Sharing Research Foundation, 1985. "Proposed Regulation Regarding Participant Directed Individual Account Plans," Federal Register 52:171 (3 September 1987), p. 33508.

January 1988 EBRIIssue Brief _ 27 The Employee Benefit Research Institute (EBRI) is a nonprofit, nonpartisan, public policy research organization based in Washington, DC. Established in 1978, EBRI provides educational and research materials to employers, employees, retired workers, public officials, members of the press, academics, and the general public. The Employee Benefit Research Institute Education and Research Fund (EBRI-ERF) is a nonprofit, nonpartisan education and research organization established by EBRI in 1979. EBRI-ERF produces and distributes a wide range of educational publications concerning health, welfare, and retirement policies. Through their books, policy forums, and monthly subscription service, EBRI and EBRI-ERF contribute to the formulation of effective and responsible health, welfare, and retirement policies. EBRI and EBRI-ERF have---and seek-- a broad base of support among interested individuals and organizations, as well as among private-sector companies with interests in employee benefits education, research, and public policy.

EBRI Issue Brief and Employee Benefit Notes ( a monthly newsletter featuring the latest news on legislation, corporate trends, statistics, events, and reviews in the field of employee benefits) are published by the Employee Benefit Research Institute Education and Research Fund with the assistance of the staff of the Employee Benefit Research Institute. For information concerning periodical subscriptions or other publications, contact EBRI-ERF Publications, 2121 K Street, NW, Suite 600, Washington, DC 20037- 2121, (202) 659-0670.

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